“Bankrupt” Doesn’t Mean “Irresponsible”

This post is part one in a two-part series by Brooke McDonald on how the current economy creates a climate more conducive to bankruptcy for middle class families and senior citizens, lessening the traditional stigma of bankruptcy as limited to young people or caused by careless spending. Part two will look at how middle class families have overcome tremendous financial obstacles and survived bankruptcy despite the odds against them.

Who is the “typical” bankruptcy filer? Is it the young married couple with a credit card problem and expensive habits? Or maybe it’s the slot-happy, single adult who vacations in the Caribbean every year and never took a personal finance class – or the entrepreneur who risks everything for the sake of a business idea but has no idea how to actually run a business.

Once upon a time, reckless spending and budgeting issues did lie at the root of many American bankruptcies – and they still do. Certainly, these issues haven’t gone away. But the image of the irresponsible, reckless spender as 2013’s typical bankruptcy filer is more pure stereotype than anything – and it’s simply not true. Real stories and statistics regarding the majority of bankruptcy filers show that bankruptcy is increasingly hitting normal middle class families who are trying to stay afloat as housing, education, and health care become increasingly more expensive.

Yes, it’s the baby boomers. Children who grew up in relative stability, in a June Cleaver kind of world, are now facing insolvency more and more frequently. Families with children are bankrupt. Older adults are bankrupt. And often, these are successful adults with professional careers and a good college degree.

What happens?

A plethora of complex and unfortunate factors contribute to this increase in middle class bankruptcy. One statistic to note is that the average middle class income is falling. In 2001, the middle-tier median income was at about $73,000, but about a decade later it had dropped to about $69,000. A tough housing market, with higher mortgages, increased property taxes, and difficulty to sell homes, has contributed to bankruptcies. Additionally, unemployment, student loans, child support, divorce, and a lack of retirement savings to live off of all cause dire trouble for families trying to make do.

Middle class bankruptcy often hits families who haven’t done anything wrong. Back in 2003, a book called The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, written by a professor at Harvard Law and her daughter, explained how working families can succumb to bankruptcy – not necessarily through irresponsibility, but due to increasingly expensive costs of everything: food, health care, education, and an affordable mortgage. The book was seen in some ways as predicting the housing crisis.

The Two-Income Trap tells stories of everyday people whose job losses and struggles to make ends meet for their families led to foreclosure and eventually bankruptcy. The authors highlight how being a parent significantly increases a person’s likelihood to file for bankruptcy.

The elderly

Along with working families with children, another growing demographic of bankruptcy filers is senior citizens. A recent study by the University of Michigan found that baby boomers are the fastest growing age group filing for bankruptcy. Between 2002 and 2010, bankruptcy amongst seniors doubled.

Expensive health care costs for seniors that can plunge them into bankruptcy include rising costs for prescriptions, hospitalization, and nursing homes. Faced with these financial necessities, many senior citizens opt to place costs on credit cards. John A.E. Pottow, a law professor at the University of Michigan, has said that seniors are burdened with 50 percent more credit card debt than younger Americans.

One benefit: the stigma is disappearing

The financially secure Cleaver family in the suburbs is fast-becoming an illusion – and maybe this is a good thing. Although the middle class’s struggles are heartbreaking, one benefit of the shift of the typical bankruptcy filer to a more normal, everyday person is that the stigma and shame once associated with bankruptcy is lessening.

Our nation knows that bankruptcy is serious – and something has to be done. Lawmakers, though not agreeing on action, have discussed the issue at length. President Obama did an exclusive interview with ABC News earlier in March saying his primary concern is to grow the economy and get Americans employed. Rep. Paul Ryan presented a budget for balancing the economy that the president has criticized because it purportedly slashes programs that middle class families need or taxes middle class families too highly.

Whatever happens with laws and the national budget, the present-day reality is that bankruptcy has become more “normal” than “irresponsible.” While bankruptcy is never an ideal situation, the United States protects its debtors through bankruptcy law and processes that allow debtors to get back on their feet. Declaring bankruptcy is one route to surviving incredible financial difficulty, and many filers do see the light at the end of the tunnel. Recovery is possible.

A person who files for bankruptcy does have hope – though it may feel that all the odds are stacked against them.

Brooke McDonald is an avid writer and online contributor for Twin Cities bankruptcy lawyer Chad A. Kelsch at Fuller, Seaver, Swanson & Kelsch, P.A. She enjoys covering legal issues and has worked as a reporter for a legal publication.